Paying the price for delusional regulation – at every level

Legislators and bureaucrats seem incapable of distinguishing idealism from what is achievable in the real world. We saw a couple of months ago that Greece was granted a third bailout after promising its creditors a primary surplus of tax receipts over government spending for the foreseeable future. As expected, its economy then plunged straight back into recession, effectively breaching the terms of the deal even before it was signed – showing once again what happens when the asylum is run by its inmates.

Another example of mismatch between idealistic dreaming and economic reality is the populist notion of “fairness” that imposes a national minimum wage on employers regardless of what their firm’s economic structure will bear. Even the remit of the Low Pay Commission (LPC) obliges it to ensure that its recommended wage rates have no significant impact on employment levels. Although the last Budget’s proposals to raise the minimum wage will benefit many lower paid workers, there is always an economic cost – according to the LPC this move could lead to 100,000 fewer jobs.

The futility of misguided employment legislation is highlighted in struggling Mediterranean countries such as Italy, which has just emerged from a triple-dip recession with youth unemployment of over 40 per cent. However, Prime Minister Renzi appears to get the message at last. He has significantly cut employment taxes on the lower paid while, against ferocious union opposition, also loosening crippling workplace restrictions on employers’ ability to shed workers.

Our own travails

Surely its good news when a regulator drops its investigation and goes home? Yes – but not when the reason for its departure is to leave the field clear for a criminal investigation by the Serious Fraud Office into business and accounting practices. This is what happened at Quindell, the AIM-listed processor of insurance claims that has been forced to restate two years’ audited accounts. The Financial Conduct Authority (FCA) has dropped its own investigation so that the SFO has full control.

The Financial Reporting Council (FRC) had already enforced the accounting restatement: Quindell’s published 2013 profits of £107 million have been changed to show a loss of £64 million; and 2014’s published loss of £94 million has been restated as a loss of £282 million.

The sheer scale of these “adjustments” precludes them from being attributed to mere matters of accounting judgement! Indeed, ongoing investigations by the FRC into the conduct of individuals, including auditors, may well lead to an embarrassing reckoning for those who failed to call a halt to one of the decade’s most egregious scandals in the London market.

Quindell’s auditors, KPMG, were also auditors of the Co-operative Bank at the time when, according to the FCA, the bank breached its listing rules by providing information that was materially false and misleading. Since then yet another regulator, the Prudential Regulation Authority (PRA), has issued a joint statement with the FCA declaring that the “serious and wide-ranging” failings in the bank’s control and risk management framework would normally have led to a fine of £120 million, but that, because of the risk that such a fine could jeopardise the bank’s financial stability, “public censure” would be more appropriate and proportionate. The regulators prefer that the bank’s capital resources should be directed “towards improving its resilience”. Wow!

A novel departure

For years I have been questioning the sense of imposing fines which effectively penalize shareholders (who have already suffered a fall in value of their holdings) of entities run by individuals guilty of manipulating accounts or otherwise feathering their own nests. Yet, to be effective, the notion of “public censure” envisaged by these regulators must include the possibility that culprits will spend long periods of quiet reflection at Her Majesty’s pleasure – and regulators must be prepared to resolve their own conflict of interest by forgoing the lucrative fines they would otherwise receive.

After thirty years of financial services enactments, all in the interests of investor and consumer protection, how is it that these twin peaks of regulation and irregularity can co-exist? It is clear that all this hugely invasive and costly regulation isn’t working.